Sunday, 10 April 2016

Dovish FOMC minutes quell April hike hopes

Written by Lukman Otunuga, Research Analyst at FXTM

The financial markets were remarkably unmoved during trading on Wednesday evening despite the dovish bias of the FOMC meeting minutes which swiftly discounted any surviving expectations of a US interest rate rise in April. Wednesday’s minutes resonated a similar tone of wariness to Janet Yellen’s rhetoric throughout Q1, while the divide forming between the Fed officials on interest rate timings continued to question the central bank’s credibility. A selection of Fed officials were pushing for an April rate hike despite the instabilities in the global markets, but others remained fearful acknowledging how stubbornly low oil prices and ongoing China woes had exposed the US economy to major downside risks. With global developments and the state of the global economy dictating when or if the Fed raises US interest rates, it seems quite unlikely that the Fed will take any action in Q2.

Dollar bears were offered some encouragement following the dovish minutes that quelled expectations of US rates being increased in Q2. The Dollar Index is still bearish on the daily timeframe and may decline to 94.00 as bearish investors exploit the Dollars vulnerability. From a technical standpoint, prices are trading below the daily 20 SMA while the MACD is firm to the downside. The current downside momentum should open a path towards 94.00.

ECB Draghi in focus

With Eurozone inflation failing to jumpstart, the ECB took the bold steps in March to unleash aggressive stimulus measures in a bid to renew Eurozone growth. The initial market reaction to the ECB slashing deposit rates further empowered the Euro bears, but when expectations of further rate cuts were diminished buyers exploited this opportunity, consequently sending the EURUSD higher. Investors may direct their attention towards Mario Draghi today for additional clarity on when the ECB may unleash further stimulus measures to weaken the Euro and boosting Eurozone growth. If Draghi reiterates his dovish mantra, then the renewed expectations of further stimulus measures by the ECB could install the Euro bears with some inspiration.

The EURUSD has experienced an incredible breakout above 1.135 this trading month following the fading expectations of US interest hikes in Q2 which left the Dollar vulnerable. This pair is technically bullish on the daily timeframe and ongoing Dollar weakness could be the catalyst needed for prices to lurch higher in the near term. From a technical standpoint, the candlesticks are trading above the daily 20 SMA while the MACD has crossed to the upside. Previous resistance at 1.135 should become a dynamic support which may invite a further incline towards 1.145.

WTI still under pressure

WTI Oil fell victim to an incessant selloff for the most part of 2016, as concerns over the excessive oversupply of oil in the heavily saturated markets encouraged bearish investors to attack prices. The value of this commodity has depreciated over 80% from its peak and with no visible slowdown in selling momentum amid the oversupply woes, more losses may be expected as Q2 commences. It was the dangerous combination of an overwhelming oversupply and faltering demand that encouraged this dramatic selloff, which saw prices decline to the painful 13 year lows of $26 in February.

With oil, it’s the solid fundamentals of an unrelenting oversupply that continue to haunt investor attraction, consequently sabotaging any real recovery in value. Despite this, OPEC has exploited the explosive levels of volatility in Q1 to manufacture speculative boosts in oil prices that ultimately acted as relief rallies for deeper declines to come. The ongoing talks over possible production freezes that offered WTI bulls a lifeline may be wearing off as Iran remains on a quest to pump at least 4mbpd. The major event risk for WTI is the upcoming meeting in April which may trigger another heavy selloff if no real solution is agreed to mitigate the excessive oversupply.

Despite the bounce from the $35 regions this commodity is bearish on the daily timeframe. Prices are trading below the daily 20 SMA while the MACD has crossed to the downside. This relief rally may provide an opportunity for bearish investors to send prices back down towards $35 and potentially lower.

Commodity spotlight – Gold

The rapidly diminishing expectations that the Fed will raise US rates in Q2 following the dovish FOMC meeting minutes may have provided the foundation needed for bullish investors to install another round of buying in Gold. We remain bullish on the yellow metal and the IMF’s meek outlook on global growth coupled with heightened uncertainties may continue to boost Gold’s allure. A key ingredient is Dollar vulnerability which may trigger another sharp upsurge towards $1250 and potentially higher. Investors should remember that factors such as interest rate hike expectations, Dollar appreciation and risk appetite were the factors that kept Gold depressed for most the part of 2015. With these factors fading away, the shackles which retained Gold bulls were cut, consequently paving a path to potential yearly highs hit. From a technical standpoint, a move above $1235 may open the gates towards $1250.

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